This article originally appeared in the October 2009 issue of Smart Business Philadelphia magazine.

During November 2008, the Securities and Exchange Commission (SEC) announced a road map for implementing International Financial Reporting Standards (IFRS) for public companies in the U.S. The SEC has proposed a timetable that targets implementation of IFRS effective for the 2014 reporting period.

People think there is plenty of time before 2014, but they’ll have to prepare for the transition far in advance. Since filings of public companies contain three years of financial information, consistency of reporting would require implementation of IFRS for 2012 and 2013. To fully implement new processes for 2012, companies likely would need to have changes in place by the end of 2011.

Why is the U.S. moving toward IFRS reporting standards?

The goal is to move toward a single set of high-quality, globally accepted accounting standards. The growth of the international equity markets and worldwide momentum of international accounting standards are driving the conversion to IFRS for U.S. companies. Many believe this will improve comparability of financial information of U.S. companies with that of non-U.S. companies. The acceptance and popularity of IFRS has increased significantly in recent years, resulting in the movement toward IFRS becoming the common set of accounting standards globally.

During July 2009, the International Accounting Standards Board addressed the implementation of IFRS for small and medium-sized entities that are not publicly held and that publish general-purpose financial statements for external users. The movement toward IFRS will most likely impact all U.S. companies.

What differences will companies encounter?

There are a number of significant differences between IFRS and U.S. Generally Accepted Accounting Principles (US GAAP). The overall financial statement presentation is expected to be significantly different, where the proposed layout of the balance sheet and income statement is based on a company’s operating, investing and financing activities.

The rules for revenue recognition represent another major difference. Generally speaking, the accounting standards are more principle-based under IFRS. For example, software companies and construction companies have different and specific revenue recognition policies that they need to follow under U.S. GAAP. The IFRS policies are more broadly based and likely will result in changes to how revenue is recognized.

Some other areas of significant changes include the accounting for inventories, capital assets, income taxes, goodwill impairment and leases.

How will the changes affect training?

Training preparers and users of financial statements represents one of the most daunting challenges. Accounting departments will have to familiarize themselves with a new set of rules to contend with the accounting and financial reporting changes. Operations personnel will have to learn the new rules, as internal and external data will now be presented in a different format. IT departments will also be impacted, as modifications may need to be made to the financial reporting systems. In addition, management personnel will have to educate the users of their financial statements, including investors, board members, lenders, suppliers and customers. The conversion to IFRS is a companywide process that will require the complete support of the senior management team. Beyond industry, there will also be significant changes in universities and college textbooks, and the CPA exam will undergo a major update.

What are the cost implications?

The costs of IFRS adoption for U.S. companies could be significant and will vary based on the size of the company. Larger SEC filers will incur more costs, while privately owned companies will likely have fewer costs. The primary costs of implementation include internal training of current employees, hiring of experienced accounting personnel or outside consultants, additional external audit costs, revamping the accounting systems, and revising internal controls over financial reporting. Some believe these costs may outweigh the benefits of conforming to a global set of standards.

How can companies lessen the impact on their resources?

Public U.S. companies should begin planning for IFRS conversion now. Because of the magnitude of the effort, assigning an experienced project manager is essential. Management should evaluate the company’s organizational structure and accounting department to develop an implementation plan and training process for all the staff involved. In addition, companies need to complete an overall assessment of the required modifications to their internal and external financial reporting systems.

Companies should also communicate the potential changes that may occur as a result of IFRS with outside parties. For example, they may have debt agreements with specific covenants and requirements to meet certain financial reporting ratios, which are most likely based on U.S. GAAP. Because of the changes in reporting and potential differences in accounting treatment, such as revenue recognition, companies may need to make significant modifications to debt agreements or other contracts.

A strategic implementation plan, budget and project timeline are crucial in order to avoid costly and problematic conversion issues as you transition to IFRS. ●